Thursday, October 30th, 2008...1:31 am
Wanted: Reliable, Dependable, Honest and Hard Worker
A good friend who works in finance for a hedge fund is interested in diversifying his personal investment portfolio. He’s lost some trust in the short term markets and doesn’t want both his career and investments to be completely reliant upon the unpredictable and irrational swings in the current market.
One investment that he is evaluating is the purchase of a laundromat located on his block in Murray Hill. He’s struck up a relationship with the owner who is looking to sell the business and retire. The laundromat appeals to him for a few reasons:
1) It’s a recession proof (or at least recession resistant) business that is hardly effected by the swings of the SP 500.
2) The valuation of the business has at a very low revenue multiple (at least compared to the public companies he is more used to evaluating)
3) The operating and execution elements are relatively basic and are already in place. There is little need for skilled labor or additional investment.
4) The business currently has no marketing. A basic marketing plan has potential to increase revenues 50&-75% (in my view)
5) If he can get the model down this is an easily scalable business (acquire multiple cleaners)
His biggest concern is finding the right person to manage the business. The current owner is willing to help train a new employee but doesn’t want to stay on for more than a few months. The laundromat really only needs one full-time manager/employee so this person would be very crucial to the overall success of the business.
My friend doesn’t have anybody in his immediate contacts who could run the business. He mentioned that he was thinking about posting an ad or going on Craigslist to try and find somebody. I shot him down on this idea. In my view he needs somebody that he can trust and who is reliable, hard working and dependable. As long as the person is somewhat competent I believe he can easily be trained. This is very much a cash business (right now they don’t even accept credit cards) so it’s important to find somebody that is honest and can be trusted and will show up for work on time every day. Those are qualities that are hard to vet with someone that you interview a few times on craigslist.
My suggestion to him was to dig a bit deeper to see if his family or friends could recommend somebody. I thought back to how my dad was able to help our synagogue find a new janitor/caretaker by reaching out to a former employee in his shoe factory. The man, Alfred, had worked for my father for over 15 years in the 80′s and 90′s and my dad knew he was somebody that worked hard and that the temple could trust.
So the main reason I’m writing this post is to ask if you know anybody who may be interested in this position. It could be a former employee or colleague. Perhaps a person in construction looking for a less physical job or somebody just starting out their career and looking for an opportunity. The job could have a salary in the 50-60K range with some upside (either stock or some kind of bonus based on performance).
The other piece of advice I shared with my buddy is to really ask all the hard questions and actively try to figure out all the scenarios in which it could fail. I helped svite acquire a small website at the start of the year. I’ve learned lots about the business in the last year that I didn’t know when we made the purchase. It baffles me why I didn’t think to do more research on the company as part of the due diligence. I was trying to fit the diligence and the excel model that we created into my desire to make the deal work. In a way, we sold ourselves on it because we were excited by the upside. We fell in love with the deal. I didn’t ask the hard questions and go the extra mile to fully understand all the different possibilities on how it might play out.
So what are the answers my friend should get before he is comfortable making the acquisition? I’m not going to throw out 50 questions this time but here are my four key points. I’ll spare you the SWOT analysis to get a bit more granular. Some of this stuff might sound a bit tedious and a little bit of overkill but will be well worth the effort. Let me know what I’m missing.
Fully understand the lease. Who owns the space and how long is the current rate locked in? Is it possible to renew or extend the lease before the sale is finalized? Also, what is the condition of the building and the costs for electricity, water? I would meet with the owner or management company if possible.
The laundrymat is not located on a highly foot-trafficked block. To compensate, a large part of it’s business is wholesale partnerships in which it does laundry for apartment building and businesses in the neighborhood. What are the pros/cons of the location? Are their any hidden pitfalls (vandalism, rats, pollution)? Who is the competition? I would suggest he spend a few days sitting in the store to see what happens through the course of the day. It might also make sense to interview other business owners or residents in the area.
The laundrymat has 18 washing machines. I would make sure all of these machines have had regular maintenance and are in good working condition. If they are not I would make sure that they are repaired or replaced before the sale. Perhaps find out who they use for maintenance and interview them.
If most of the business is done wholesale I would speak with the top five accounts. Is there a way to tie these accounts up or at least get their feedback on business? The laundrymat also sends out its dry-cleaning to another place. It would be worth checking into that relationship. It’s important to ensure that the revenues are real and sustainable.
Finally, I would really try to understand and evaluate all the issues and envision where things could go wrong. One of the guys I work with at Media instantly gets excited when he is pitched new ideas in biz dev meetings. But then in the next breath he likes to ask for an example of a deal that didn’t work out and why it failed. He’ll push back if he doesn’t get an honest answer and this helps him
a) Understand how the deal might fail
b) Evaluate the answer and read between the lines.
I like the way he pulls off this tactic and I have begun to incorporate the approach into my style as well. It’s amazing how much you can learn if you scratch the surface a bit or ask the dumb question that seems so obvious. Sometimes, it’s even interesting to ask the same question in a different way to see if the answer is consistent.
So shoot me a note if you have anybody who can run this business or if you’re interested to learn more and I’ll put you in touch.